Friday's Market Minute: Long-Term Rates Pressuring Stocks And Bonds

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Broad equity markets are on pace for three consecutive weekly declines as the Fed maintains a generally hawkish tone on inflation. Bears currently control the short-term trend but the primary bullish trend remains intact. The FOMC minutes from the most recent policy meeting in late July suggest the Open Market Committee still sees upside risks to inflation, which could require further tightening of monetary policy.

Even though inflation continues to decelerate even as economic output continues growing, the risk of reaccelerating inflation expectations has recently weighed on prices of risk assets. According to the CME FedWatch Tool, markets have priced in a 90% probability that the Fed will leave interest rates unchanged at its meeting in September. However, the chance of a 25-basis-point rate hike to a range of 5.5%- 5.75% at the subsequent meeting in early November went above 30% after the release of the minutes.

Long-duration Treasury yields have moved much higher in the past weeks on the back of market speculation around higher for longer rates and term premium normalization. Until this month, the 10-year treasury yield had struggled to stay above 4%. As of yesterday, the yield nearly breached the October 2022 intraday highs of 4.33%.

The long end of the yield curve has lagged severely the short end in this cycle, but it is now catching up. Taking into account the difference between the 10-year yield and the most recent inflation data, real interest rates are rising which is restrictive on both stocks and bonds in the capital markets. Notwithstanding the recent meeting minutes, or where the Federal rate will be at the end of the current tightening cycle, the recent speed and magnitude of yields rising has put equities under near-term pressure.

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